(What a pleasure it is to rewrite this column. I wrote when I was angry at myself for having to sit on my hands at a time when I see bargains. I wrote it frustrated that I wasn't doing more at work, but I figured that no matter how good the employment number would be, there would be a hesitation and I could commit capital. That turned out to be right. Mostly, I think I wrote it because I want my expertise, which comes from trading in more than just this era's market, to shine through and help you make decisions in an environment that many of you are not used to -- a rising-rate environment. If 40% of the people who trade now trade online, and nobody traded on line three years ago, it is safe to assume that many of you have only traded in a pretty benign rate environment. I have traded in many environments, and I want to give you the benefit of my experience. In this sense, I can be your very inexpensive -- both in costs to understand and in commission -- teacher. And I have nothing to sell you.)
If I thought it would make me money, I would be more bullish. I am not a theoretician, throwing stones from the sidelines. I am not a preternaturally bearish journalist, angry at the world that there has been such great wealth created as I took an oath of near poverty to stay in the writing game. I am not someone who wishes stocks would go lower because I am net short and need cascading prices to pay the bills or buy the yacht for that matter.
(Wow, what a belligerent paragraph. But let's pull it apart. First, unlike most of the people you read in print, I have to make money. I am performance manager. If I think the market is going down, I am supposed to profit from it. If I think the market is going up I am supposed to profit from it. If I thought the market was about to plummet 1,000 points, I would short stocks. I would not go into cash or buy more defensive stocks, or raise a few million dollars. I would sell. That distinguishes me from many other non-hedge fund managers, such as mutual fund managers. Most of the managers you see on television wouldn't do much of anything if they thought the market was about to drop 1,000 points. The commentators you hear from wouldn't care if the market were to take a big hit, except for the "excitement" of it. Me? I am expected to do something or be considered irresponsible. That said, I obviously don't think we are staring at that kind of decline, or I would be short, and, more important, I would be telling you I am short. I play with a huge handicap in some ways in that I have to disclose how I am positioned. That's okay for me because I have conviction in my views and because I can change my views. But I am writing a diary of what I am doing, not a diary of what I am not doing, and not a dissembling of what I might be doing. In short, you are getting what I see, hear and do each day at
, whether it works later or not, as I am not editing myself for mistaken decisions.)
(The oath of poverty thing is a personal issue with me. Some of the reporters who read me probably despise me for that line. But that's stupid; they shouldn't. I worked with that vow as a one-hatted journalist for five years, and I still carry around my tattered Tallahassee Democrat reporter's pay stub for 3/15/78 showing the $200 a week I lived on so I don't forget it.)
I put my money where my mouth is. If I am wrong, it will cost me money. If I am really wrong, it will cost me clients and money. I can't afford to be bearish for long if the market ramps. Did that once before, last year. Pretty painful.
(Here again is the big issue for me, why I think I am valuable, and why others in the media tend to scorn me: I am a living breathing stock picker who lives or dies by my P&L. I am paid to make judgments about where the market is going. If I get them wrong too often, I go out of business. Those are high stakes. They are what makes my job compelling to me. I live and breathe this job, and I love it. And when I get it wrong, as I did for some of last year, it drives me crazy and to the poor house simultaneously. You have never worked with me. But every day for those who do is a trial. I was miserable, for example, this past Friday because, given how right I was about waiting, and how much opportunity there was Friday to make money, I didn't do enough right. I was furious and depressed about it. Why didn't I take more
(LU) ? Why not double down. I LIVE TO GET IT RIGHT and I am severely depressed, even now, after all of these years, when I get it wrong!!)
Why so much hand-wringing over a couple of less-than-positive articles about the market? Because I am clearly uncomfortable not liking the market full throttle when there are a ton of stocks that are down. I see a lot to like. But I am also trying to get it right for more than just a day.
(What makes things even tougher was that I was bombarded with mail from people on the day I wrote this piece saying, "You missed the bottom in the Net by waiting, you stupid loser." The very next day the
dropped by about 5%. Was I supposed to save those emails and send them notes like "You stupid loser, look how much money you lost?" No, because, in the end, I care about getting it right, and I don't care if someone else got it right or wrong and I didn't.)
I have traded through many
cycles. There have been several tightening phases during the 17 years of bull markets. Everyone of them came and went and left, in their wake, higher, not lower prices. I think this tightening phase will be exactly the same.
The reason the Fed tightens is to keep the economy running smoothly without overheating -- exactly the way the stock market likes it!
(The Fed doesn't sit around and say, "Hey that stock market's going up too much -- let's raise rates and kill it." Nor does the Fed say, "Too much of a good thing -- let's clamp down." What the Fed says is that if you let speculation get out of control and have too many shortages in the economy, it will crash on its own volition, a la Japan in 1989, so it is better to be preemptive, slow it down, and allow things to grow less helter skelter. That preserves the bull market. We want the Fed to tighten so we don't get thrown out of the game the way the Japanese have been this decade because their "Fed" was oblivious to the most obvious overheating in history. Any time you think that the Fed is being overly cautious, please look at Japan. I have to tell you that in the 80s, there were times when all I did was trade Japan. I would buy them when I got home and then sell them the next day. They always went up. Sometimes brokers would buy stocks for you and sell them and put money in your account. The brokers encouraged you to borrow millions upon millions of dollars to buy "what we are taking up tonight," and I used to think this was too good to be true. What was amazing was how long it lasted. You think the Net was easy money in the first three months of this year? Imagine that frenzy for eight years and you have Japan in the 80s. And by the time it was over, everybody with 10,000 yen was borrowing a million yen to buy stocks. And when the market went down, a nation was wiped out. Now you can't get those people to buy hard goods or invest in passbooks; they've got their money in mattresses. Their investment culture has been crushed. You want to be them?)
If the Fed doesn't hike, then the economy gets too hot, and inflation soars and interest rates go up big. You don't want to know where this stock market could go if the Fed weren't vigilant. If interest rates go to 7.5%, a level once thought of as benign, because bond holders are demanding more compensation for the inflation risk, stocks are ridiculously high.
(I know 7.5% doesn't seem like much compared with those S&P returns of the last few years, but how about if you didn't have to do anything to earn it and it had very little risk? Well, that's how it was for much of my career. Money would stream out of this market like there is no tomorrow if rates shot up that high, because that's an incredibly competitive rate. I know it seems very far away, but rates are up about 25% this year, and another 25% would put us right there. It would be dreadful for the stock market. If you don't believe that, you are fooling yourself.)
Sometimes the only way to keep inflation low and long-term rates low is to tighten.
Here's how that works. Let's go back to yesterday's Sheetrock tightness story. The Fed hates speculation. It hates to see people stockpiling anything in anticipation of price hikes. It particularly hates people taking things down on margin -- wallboard or stocks or houses or land -- because they expect higher prices no matter what.
By raising rates, the Fed breaks that cycle. Again, in the case of Sheetrock, if the Fed raises rates, making it more expensive to carry inventory and making home building less robust, the effect is to brake the economy
until more Sheetrock comes into production, eliminating the shortage.
The economy has a way of healing itself as long as it isn't growing too fast.
(I am convinced this is happening, as a later piece will show.)
Right now, the Sheetrock business can't keep with the demand, but I am confident that six months from now the supply will be plentiful. Until then, though, it sure would be easier if the Fed dampened demand, even though it is with the only tool in its arsenal, higher rates.
My bet is that by the time the tightening occurs, everybody will at first hesitate, maybe even sell a bit in typical knee-jerk fashion, and then buy. The bondholders will be happy with the Fed's vigilance and they will buy more bonds and the equity holders won't think that the hike will hurt the economy too much and they will come in and buy.
(We got a real reprieve Friday. Oh the TV guys said it was a confusing number, and I guess I agree. The point is that if it is "confusing" then it is not clear cut what the Fed should do. If it weren't confusing, it would be because it was obvious that the Fed would have to tighten and then we would never have had the rally we had. As a performance money manager, I had to check my innate bullish feelings for this market until I was sure we didn't have a horrific number -- EVEN IF IT MEANT MISSING THE FIRST 100 points. It didn't, and my bet paid off -- although it should have been bigger!)
If I did not think I could react fast enough, or if I ran billions of dollars, I probably couldn't wait until the actual tightening. I would have to be buying ahead of it. There just wouldn't be the time, or the window, to put the money to work.
But I don't run billions and I am nimble. I am betting that at the time of the tightening there will be a selloff. I could be wrong but, again, I am paid to make these judgments and predictions. It is during that selloff that I want to strike and bet that the selloff will be an overreaction
given how much the market will have already come down
(Again, I like many of the stocks that I see, but when we are hostage to the Big Bad Events, I don't want to see through them. I want to wait until I see the whites of their eyes. Do you think that if 400,000 jobs had been created, we would have had the market we had Friday? Don't you think it could have been much uglier? I didn't know what it would be, so I hung back. If I knew it would be 400,000, I would have had many shorts on, particularly in the financials, as they do poorly when the Fed has to be extra vigilant. Not coincidentally, they had a healthy rally Friday.)
Ultimately, if I were a perma-bear, I would just wring my hands and say "first of many tightenings, look out below." I am not. I will be an opportunist bull at that moment.
(Lord help me, I hate the perma-bears, as they have no standing with me. They have cost you a fortune. They have left you dry at the greatest investing moment in history -- this decade. And they never own up or apologize for getting it wrong. NEVER! Shame on them for getting it wrong.)
Until then, I will strictly trade 'em.
(I will rent them until Thursday and have to have a look-see at that PPI before I go full throttle again.)
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Cisco and Lucent. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at